Former President Donald Trump proposed eliminating taxes on overtime pay for workers who work more than 40 hours a week. While this could have positive economic effects, it is estimated to reduce federal revenues by nearly $227 billion over the next decade. Trump’s proposal is part of a larger effort to lower individual taxes for Americans, including eliminating taxes on tips and Social Security benefits. Vice President Kamala Harris has also pledged to abolish taxes on tipped wages. The reaction to Trump’s proposal among economists and market observers has been mixed.
According to data from the Bureau of Labor Statistics, over 34 million people worked 41 hours or more last year. While the proposal may benefit many workers, it would face significant fiscal hurdles. The Tax Foundation estimates that removing taxes on overtime earnings could reduce federal revenues over the next 10 years. The exact decline in tax receipts would depend on the specifics of Trump’s plan. If all overtime pay is exempt from the individual income tax, the revenue reduction would be around $227 billion. However, if exemptions exist for all pay associated with working more than 40 hours per workweek, the decline could be as high as $1.1 trillion.
The impact on government coffers would depend on how Trump institutes this policy alongside other tax cuts totaling roughly $6.1 trillion. The federal government is already facing a $1.9 trillion budget deficit.
In recent years, Americans have been working fewer hours. The median hours worked declined by nearly 2 percent between December 2019 and December 2023. The average hours worked per week in 2023 was 38.5, down from 38.6 the previous year. Additionally, there is a worker shortage in the labor market, with the economy missing 1.7 million people from the workforce compared to February 2020.
Trump’s proposal may encourage a modest return to work and have positive economic effects. By providing a lower tax rate or eliminating it altogether, workers may be more willing to accept additional hours or request more overtime work. Currently, workers may be hesitant to work overtime due to the fear of being placed in a higher tax bracket.
However, there are concerns about increased administrative complexities if overtime pay is exempt from taxes. This could complicate the tax code and raise administrative and compliance costs. The question of whether overtime income should be taxed differently from other income is also raised.
Trump’s proposal would require Congressional action. In July, Rep. Russ Fulcher introduced legislation to eliminate income taxes on overtime pay. This is the first time this idea has been attempted at the federal level. However, Senate Finance Committee Chair Ron Wyden believes that Republicans in Congress have no intention of passing this proposal.